Bill Gates and Microsoft have committed the crime of understanding the Information Age better than anyone else. Now the Reno Justice Department has joined forces with Gates’s competitors to teach him a lesson, ignoring what his brilliant career could teach them.
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Why are the browser wars different from any other Coke-versus-Pepsi-type market, where two firms battle for market share? (In fact, Pepsi sued Coke for anti-trust violations at almost the same time that DOJ sued Microsoft.) The reason is that computer users prefer uniformity. A web browser is, in effect, the operating system for the Internet. “With extra work you can write HTML code that will work on both Netscape and Explorer,” says David Smith, vice president of Internet strategies at the Gartner Group, “but if you want to take advantage of all the bells and whistles you have to choose one or the other.” Anyone developing an “e-commerce” site faces a choice: to develop site for Netscape or Explorer. His decision is determined largely by what everyone else is doing.
OF COURSE THERE IS the possibility that some other standard will eventually prevail. This is what Scott McNealy, CEO of Sun Microsystems, intended in creating Java, the language that enables programmers to “write once, run anywhere.” McNealy has put together a consortium of Microsoft rivals — IBM, Oracle, Novell, Netscape, and TCI — in the hope of creating a “network computer,” a personal computer that stores both its programming an memory on a giant “server” — the Internet itself. Sun has licensed Java cheaply and there are now 700,000 programmers writing in the language. Writing in Wired in 1996, George Gilder predicted that the anti-Microsoft consortium could soon make Windows obsolete.
But Microsoft has not stood still. On April 3 of this year, the Wall Street Journal reported that, following several missed deadlines, Federal Express had canceled its contract with Sun for the replacement of its older UNIX system, and had turned to — would you believe it? — Microsoft. The Redmond giant had once again turned on a dime. Gates has purchased a small Florida company with competing technology and is already marketing its own network computer. Sun has filed an anti-trust suit charging that Microsoft is trying to create a version of Java incompatible with Sun’s system.
So what does the Justice Department hope to accomplish by suing Microsoft? In building its case, DOJ has relied heavily on the theory of “path dependence” developed by economist Brian Arthur. Along the road of progress, Arthur argues, early decisions, made arbitrarily, often establish technologies that are “objectively inferior.” His favorite example is the QWERTY typewriter keyboard, designed with no apparent logic, which has been almost impossible to dislodge.
Microsoft’s efforts to “set the standard” surely qualify as a case of “path dependence.” But will Justice be able to establish that Microsoft products are objectively inferior or arbitrarily chosen? It seems unlikely.
The irony is that path dependence cuts both ways. In the office market, Windows NT — an industrial-strength version of Windows — is a clearly superior product yet still holds only an $8.5 billion market share as opposed to UNIX’s $49 billion. “UNIX is too technical — it’s too hard to learn,” Roger Kash, manager of Saturn Corporation in Tennessee, told Industry Week in 1996. Among other problems, it lacks the point-and-click environment. So why does UNIX continue to dominate? “If it weren’t for the financial investment we have in the UNIX environment, I’d go to NT in a flash,” Jeff Sherman, of Remington Arms Co. in Delaware, told Industry Week. “If we were to start from scratch today, Windows NT would be a very serious consideration,” added Dennis Courtney, of Dunlop Tire in Buffalo. “But we’ve already made the big switch from the mainframe to a distributed client-server environment, so we wouldn’t just change over right now.”
Were the government seeking to break up path dependence in order to clear the way for a better technology, it might go after UNIX. Were it trying to right old wrongs, it might investigate the dubious steps that gave Netscape an early head start in the browser market. Yet DOJ has chosen to go after Microsoft. The question remains, why?
WHAT MAKES MICROSOFT such a different company that even old-line competitors such as Disney, Knight-Ridder, and General Motors feel threatened? The answer seems to be: Not only has Microsoft led America into the Information Age, it has also absorbed the lessons of the Information Age better than anyone else.
The first lesson is in applying information technology to internal management. In the 1980s, Peter Drucker pointed out that the only task of middle management in American corporations was to ferry information back and forth between the foot soldiers on the front lines and the executives who made decisions in remote corporate offices. Computers have short-circuited this process, giving executives more up-to-date information and giving foot soldiers enough knowledge to make more decisions.
Microsoft has an extremely flat corporate hierarchy. Gates is exceptional in his comprehensive awareness of the business (he reportedly knows the license plate numbers of most of his top executives), but he is also extraordinarily accessible: any Microsoft employee can e-mail the CEO and expect an answer. “Microsoft has an amazing ability to communicate internally,” says Carl Howe, director of computer strategies at Forrester Research, in Cambridge. “You talk to fifty different people inside there and they all have exactly the same story.” The result is a company that is very, very fast and alert in responding to market changes. With a cash reserve of $10 billion — more than the annual revenues of most major companies — Microsoft combines the giantism of an American corporation with the speed agility of a corporate “gazelle.”
Microsoft has also understood the implications of the Information Age for consumers. Take the case of General Motors. In tried-and-true fashion, GM has posted its own products on the Internet, waiting for consumers to queue up out of brand loyalty. But things don’t work that way anymore. In the Information Age, consumers have many more choices at hand. Economists have long noted that “information costs” are what prevent us from enjoying Adam Smith’s ideally free market where competition always brings prices to their lowest marginal level. Most real-world transactions take place with imperfect knowledge; there are better and cheaper products available but consumers don’t know about them. The relentless scythe of cheap information, however, is cutting across the entire spectrum of commercial transactions. Buyers and sellers are finding each other as never before. It is Microsoft’s greater understanding of the Information Age that has Michael Eisner and Rupert Murdoch quaking in their boots.
Many of Microsoft’s practices are indeed blatantly anti-competitive. Forbidding computer manufacturers to load or advertise non-Microsoft software on Windows systems is almost certainly illegal. DOJ and the courts will do well to end these practices. Customers should also be allowed to choose which Web browser they want coupled to their operating system. As for forcing Windows to carry Netscape’s Navigator, however, that sounds like one of those jerry-rigged anti-trust solutions that is supposed to “level the playing field,” but only forces all competitors into the same procrustean bed.
But even if Microsoft is forced to sell other people’s products — even if Bill Gates is required to carry a 50-pound sack of Netscape Navigators on his back for the rest of his life — it is doubtful Microsoft will be any less formidable. Consider this: In 2003, a company named Teledesic is scheduled to launch its “Internet in the Sky,” a network of 288 low-orbiting satellites that will link together the remotest parts of the world into one fiberless network with bandwidth broad enough to support high end-uses such as videoconferencing. Founder and president of Teledesic is Seattle telecommunications magnate Craig McCaw. The other two principle investors are Saudi Prince Alwaleed Bin Talal and William H. Gates III. Guess which one is most likely to have his company prepared to take advantage of the new technology?
William Tucker is The American Spectator’s New York correspondent and a columnist for New York Software.